If you’re turning 18 soon and you’re worried about your financial future, good for you! You’re already leagues ahead of most of your peers, and you’ve come to the right place! Believe it or not, 74% of teens do not feel confident in their financial education.
Fortunately, with the right knowledge and understanding of your credit, you can set yourself up for future financial success. Everybody starts somewhere, and it’s usually on your 18th birthday.
So, what is your credit score when you turn 18, how can you improve it, and how long will it take? Let’s talk about that.
Factors in Your Credit Score
Credit scores range from 300 to 850, with 300 being the worst and 850 being the best possible score. Understanding the factors involved in your score is essential. Here are the most important ones.
Your payment history is by far the most important aspect of your credit score, accounting for 35% of your entire score. This includes any missed payments on your credit cards, installment loans, or other purchase agreements. Failure to pay medical bills, rent, utilities, or other regular payments could result in a major hit to your score.
At all costs, try to keep your payment history at 100%. If you miss a deadline, that’s okay, just make sure you pay it before 30 days pass. If you don’t, it will likely be reported to the credit reporting agencies, which will harm your score.
Of course, you should avoid late payments generally, as they typically come with fees. However, they will hurt your score after 30, 60, and 90 days, at which point, they are considered delinquent. Even one missed payment could turn a 700 credit score into a 600 score, especially for newer credit.
Also, the most important fact to consider is how long your payment history will last on your score. Typically, missed payments will last for up to 7 years, but some can last for up to 10.
Credit utilization accounts for 30% of your score, making this the second biggest factor. This factor is all about revolving lines of credit like credit cards. The balance that you leave on these after each payment period is considered your utilization.
Ideally, you want to keep utilization under 10%, but under 20% is still good. Anything under 50% should not hurt your score in the long term. Still, the lower, the better.
Let’s say you have a credit limit of $5,000. In that case, spending $700 and making a payment of $200 or more will actually help your credit. Leaving a balance of $50 (1%) at the end will help even more.
Creditors want to see that you use your credit cards and that you can pay down debts consistently. It’s okay to leave a balance on your credit card occasionally, but paying them off in full is even better. If your credit limit increases, try to keep your spending habits the same!
Of course, this can easily get out of hand. Over 30% of US adults have between $1000 and $5000 in credit card debt, with over 14 million Americans having over $10,000.
Fortunately, this tends to have only a short-term effect. If you pay down your balance, the drop in your score should not last for longer than a few months to a year.
Age of Credit
The length of your credit history is a factor that you can only improve with time. This accounts for 15% of your credit score, and it isn’t worth worrying about so soon. All you can do is keep your credit lines open and in good standing for as long as possible.
If you open a new credit card, don’t close it. Even if you find a better credit card, keep the old one and make small transactions every month, paying it off in full. The longer these lines stay open on average, the better.
Creditors want to see that you can manage different types of debt successfully. For this reason, having three credit cards will not boost your score as much as two credit cards and a car payment. They want to see a healthy mix of installment and revolving lines of credit.
This accounts for 10% of your credit score, so it isn’t worth going into debt to improve. However, if you’re already financing a vehicle or have student loans open, it may not hurt to open a credit card!
New credit is measured by the number of hard inquiries into your credit, and this accounts for 10% of your score. However, this isn’t something to worry too much about. Typically, you’ll need hard inquiries to open new lines of credit, which you’ll need to boost your score.
No, that doesn’t pose a “catch-22”. It’s worth it, in the long run, to open new lines of credit when you need them. Hard inquiries only last for a maximum of 2 years, but if you only have one or two, it’s unlikely they’ll last for longer than a few months, and they’ll only drop your score by a few points.
It is still important to consider this when opening new lines of credit. Too many hard inquiries at once can do damage to your score.
What Is Your Credit Score When You Turn 18?
Let’s start off with the answer; it’s a trick question. You don’t start out with any credit upon turning 18. Instead, you start once you open your first line of credit, based on the formula provided by the credit reporting agency.
The three major credit score agencies are Transunion, Equifax, and Experian. You may also see reports with your FICO score. These agencies determine your score between 300 and 850 depending on various factors, including the ones mentioned above.
However, you don’t start with perfect credit at 850 or have to work your way up from 300. Once you open your first credit line, including student loans, credit cards, or anything else, your score will be determined for you.
Simply because you have one line of credit and such a limited credit history, it’s impossible to achieve an 850 score as an 18-year-old. Don’t worry, you don’t have to! So, what is a good credit score for a young adult?
For all intents and purposes, a score above 680 to 700 is perfectly acceptable to most lenders. This is something to strive for early on and continue building upon throughout your adult life. Let’s talk about how.
How to Build Credit
When you open your first line of credit, you will be given a score. If you take out some money and bring it back and return it the next day, you’ll have a perfect payment history, which is the largest factor in your credit score. This is a great opening strategy, but it won’t last forever.
Since you can’t do anything about your age of credit just yet, we strongly recommend opening accounts to help your credit mix. Let’s say your parents currently pay for your car.
In that case, ask to have your name put on the loan. If you feel you can be responsible, open a credit card. These two changes alone will show both installment and revolving loans on your credit mix.
However, we would never suggest doing anything that would hurt you financially. Don’t take out personal loans or anything you can’t handle just for the sake of short-term credit score boosts. This is very dangerous so early in your adult life.
Instead, there are things you can do that will safely boost your credit. Here are a few examples.
Open a Credit Card
Opening a credit card is the easiest way to start building credit for most, and there are many ways to do it safely. For example, opening a secured credit card will limit your risk. This way, you’re essentially borrowing from yourself while building credit.
Another idea would be to keep your credit card away from your wallet and use it for regular purchases. Most of us pay for some type of subscription purchase ($133 more than we think, on average), which is quite a steady and predictable price. Paying for your subscriptions each month and then paying off the balance on your card is a great way to build credit.
Of course, you can use your credit card for regular purchases, but taking responsibility is essential. Not only could one mistake hurt your score, but 25% interest rates could put you into serious financial trouble. If you’re worried about overspending and going into debt, try one of the options above.
Start Paying Student Loans
You’re going to have to pay them at some point, right? Even if you make small payments now, every dollar you put in is a dollar you won’t have to pay later on. Putting some money into prepayments could help your credit score.
Treat Installment Loans Carefully
If you finance a car, take out student loans, or open another type of installment loan, stick closely to the terms of the loan. While it may seem counter-intuitive, paying off and closing an installment loan too early can hurt your score.
Let’s say you take out a car loan with payments of $250 a month. In that case, paying $300 every month and paying off the loan a few months early is perfectly fine. However, making two payments of $250 and then closing the entire account could do some damage to your score.
This is because your age of credit counts the average age of each account. If one of them is only open for a couple of months, this could make it harder to build upon that factor over time.
Protecting Your Identity
Unfortunately, fraud is rampant in our society, and young adults are a prime target, as they are the least likely to notice. Following the right identity protection protocols will ensure that your credit isn’t destroyed by forces outside of your control.
If you don’t think it’s common, think again. There have been dozens of large-scale breaches that divulged millions of people’s information at once, and those are just the ones we know about. Believe it or not, 7% to 10% of all Americans each year.
How Long Does It Take to Build Credit?
Since you effectively start with no credit, how long will it take to build? Honestly, it depends on your habits. If the first thing you do is open a credit card and pay it off, you’ll likely start with a decent score.
However, if you already have student loans open that are just sitting and waiting, it might be a little harder to raise your score. Just remember to stay consistent, follow best practices, and don’t take out debt you can’t handle.
As a college student, this can be challenging. Saying no to peers isn’t easy, and college comes with a lot of expenses. Remaining aware of your credit is a great first step.
Don’t check your score too often, and don’t obsess over it. Simply form the right financial habits, avoid common mistakes, make your payments on time, and you will see results.
By following the best practices mentioned above, it shouldn’t take more than a few months to a year to reach a score above 680 or 700, which is considered a good score. However, climbing from there will take longer to improve your age of credit.
Start Building Credit Today
Now that we’ve answered the question “what is your credit score when you turn 18?”, you can see why building young adult credit is overwhelming for some. Financial literacy is almost likely learning a new language, but once you get used to it, it becomes second nature. Following these tips will set you up for a bright financial future!
Stay up to date with our latest financial advice, and don’t hesitate to contact us with any questions or for help with building credit!